The Big Company Doesn't Always Win

from the a-reminder dept

In our debates over the patent system, one message is repeated over and over again by those defending the patent system: that it's needed to prevent big companies from coming in and stomping out smaller companies. Unfortunately, the evidence just doesn't support this. Yes, it does happen sometimes, but there are so many examples of smaller companies outrunning bigger companies that the idea that a big company can easily beat a smaller company is just rubbish. In fact, the NY Times now is running an article noting how no large tech company has ever really been able to thrive through multiple generations of technologies. A smaller, more nimble "game changer" comes along and out-innovates the larger company -- in many cases because that larger company isn't just slow to react, but also because they have legacy lines of business that prevent them from fully embracing the cannibalizing nature of disruptive businesses. Once again, this highlights the the importance of the process of innovation, rather than just the idea. The big company with lots of money may get "the idea," but if it can't full embrace it, it won't do a very good job implementing it. So, while big companies do have some advantages, it's a clear myth that any big company can step in, take a smaller company's idea, and succeed with it. Microsoft outran IBM. Google outran Microsoft. Netflix outran Blockbuster. YouTube outran Google (and then got bought by it). The list goes on. Being smaller doesn't mean you can't win against a larger player if you do a better job providing what customers really want.

Re: Bullshit !!!

Netscape? What about Firefox? just cause small companies tend to beat large companies does not mean that being small means you automatically succeed. Small companies beat large ones because though they roll fewer dice, there are more of them rolling the dice, so they get critical sucesses more often. But for every crit sucess there are also crit fails.

Re: Bullshit !!!

Angry dude, work on your reading comprehension. I didn't say the small company always wins. Netscape sold for billions, btw, so I'm not sure that was really a failure.

And Netscape's real problem was bad strategy. It had a huge lead and squandered it by making the software more and more bloated and not focusing on making it work well for customers. Instead, it tried to build a huge pay-software business that no one wanted.

Transmeta's problem was also poor strategy. It's chips were better, but not so much better that it made a big enough difference to customers.

Re: Bullshit !!!

An example from history...

The smaller more nimble English war ships beat the much larger more established Spanish Armada ships in the The Battle of Gravelines.

It is an excellent example of how large, sturdy, well established, heavily armored ship or company can be brought down/overcome by smaller, nimble ships or companies with less resources but more will and innovation.

Do we have to wait for the paradigm for competition

I don't really see how the article supports Mikebob's conclusions.

Hopefully we don't have to wait for a paradigm shift for competition, but even if we did it didn't show they were won by small companies, unless of course you think that remembering when a company was small means it's still small.

Google was pretty good sized when it started beating M$ brains in on line. M$ had done a very successful job of defending it's monopoly through what courts have decided were illegal means for decades. If this is Mikebob's idea of competition then heaven help us.

It hard to read that article and say small guys beat big ones. You might say that small companies which grow to big ones can beat the current big ones when there is a paradigm shift but that seems to be about it.

Additionally, IBM is still one of the largest computer company in the world.

Re: Do we have to wait for the paradigm for competition

Google was pretty good sized when it started beating M$ brains in on line.

Actually, no, Google was tiny, and grew by beating up on both Yahoo and Microsoft. But, ok.

Additionally, IBM is still one of the largest computer company in the world.

Yes, after stumbling around for a while and having to choose an entirely different business to be in. It's successful now, but in a totally different business thanks in large part to Microsoft's efforts.

Do we have to wait for the paradigm for competition

Mjr1007 wrote:
Google was pretty good sized when it started beating M$ brains in on line.

Mikebob replied:
Actually, no, Google was tiny, and grew by beating up on both Yahoo and Microsoft. But, ok.

Mjr1007 replied:
Mikebob, do you even bother to RTFA?

“The last year when Microsoft made a profit in its online services business was the fiscal year that ended on June 30, 2005. “

If you look back to the beginning of 2006, half way through the next year, Google had a market cap of over USD 100 billion. One of those nice small nimble companies, right Mikebob?

Mjr1007 wrote:
Additionally, IBM is still one of the largest computer company in the world.

Mikebob replied:
Yes, after stumbling around for a while and having to choose an entirely different business to be in. It's successful now, but in a totally different business thanks in large part to Microsoft's efforts.

mjr1007 replied
So, is it you assertion that IBM wasn't in the mainframe hardware, mainframe software, and services business when they were an M$ customer via their PC division? The only competition that IBM lost to M$ was OS2 and that was a very very small percentage of the IBM pie. Once again Mikebob, more rhetoric then reason.

Ecosystem thing

It's an ecosystem thing. The larger a given player in an ecosystem is, the more resources it can use and keep any given competitor from using. But it can't keep all competitors from all potential resources - it has to specialize in some given area.

The environment changes around it, and some new resource pops up, and before we know it, some smaller competitor develops to use that new resource, which outgrows the old major resource, and the smaller, newer competitor starts filling the niche that the old major player had taken for granted. In the mean time the old major player is getting starved on what remains of its major resources, and we have die-back. Either the old major player adapts through the die-back trauma to the new situation, or it fails the die-back process and goes extinct.

It's true of all ecosystems that I'm aware of - admittedly it is a while since I read Kruuk, Schaller, etc ... but if you consider markets as ecological niches, and each company as filling one or more niches, it becomes easier to understand. Anything more I need to add?

Re: Do we have to wait for the paradigm for competition

> Google was pretty good sized when it started beating M$ brains in on line. M$ had done a very successful job of defending it's monopoly through what courts have decided were illegal means for decades. If this is Mikebob's idea of competition then heaven help us.

I don't know. It makes sense to me. In fact, it shows that Microsoft was vulnerable. Google did come out of nowhere to beat Yahoo, AltaVista, Lycos, Excite and a bunch of others at a time when people thought that no search engine could do anything.

Then it went on to beat Microsoft who has a ton of cash and supposedly had this all powerful monopoly to leverage.

And Google still beat them. I think that supports Mike's conclusion that the big company doesn't always win.

Can you explain how the big company won here?

> Additionally, IBM is still one of the largest computer company in the world.

But Microsoft destroyed them in the PC OS business, which IBM thought was it's to dominate. Again, exactly as Mike said. Most people thought that IBM, with it's position, power and reputation could easily destroy the little upstart.

Didn't happen.

Not sure how you can read those facts and say that Mike's position isn't correct.

Re: Do we have to wait for the paradigm for competition

“The last year when Microsoft made a profit in its online services business was the fiscal year that ended on June 30, 2005. “
If you look back to the beginning of 2006, half way through the next year, Google had a market cap of over USD 100 billion. One of those nice small nimble companies, right Mikebob?

mjrbob, may be they got to have that market cap by being good for a long time? You know, market capitalization does not happen just because someone had extra money laying around and they dropped 100 billion on a weirdly named company. Your argument is absolutely asinine.

So, is it you assertion that IBM wasn't in the mainframe hardware, mainframe software, and services business when they were an M$ customer via their PC division? The only competition that IBM lost to M$ was OS2 and that was a very very small percentage of the IBM pie. Once again Mikebob, more rhetoric then reason.

mjrbob, are you REALLY senile enough to assert that IBM's main business now is still mainframes and that their service sector was anywhere as large then as it is now? There are numerous papers written about the transformation of IBM and its move from one industry into another. mjrbob, read a Forbes or something.

mike:
you miss the point. the big cos weren’t able to beat the small cos because the small cos had patents that protected their IP. look at how walmart tried to unseat netflix, but netflix defended w/ patents. geez!!! surely you only say these things to get a rise out of us. you really aren’t this thick skulled are you...or corrupted?
stv

Re: Do we have to wait for the paradigm for competition

I don't keep up on this sort of thing, but it occurs to me that if the last time MS made profit online was in 2005, then that means that they would have been losing market share for some time before then, right? So pointing out that Google was huge after successfully beating MS doesn't seem to prove much.

Re:

you miss the point. the big cos weren’t able to beat the small cos because the small cos had patents that protected their IP. look at how walmart tried to unseat netflix, but netflix defended w/ patents. geez!!! surely you only say these things to get a rise out of us. you really aren’t this thick skulled are you...or corrupted?

Actually, in almost none of those cases did patents play a serious role. Netflix did threaten to use its patents against Walmart, but was already beating the company soundly by that point, which had nothing to do with patents. Netflix' success in the market had nothing to do with its patents.

Re:

I'd actually argue the other way around: patents allow a large company to cut off more-nimble companies without having to over-extend themselves. If a large company gets hold of a patent that raises the cost of entry into a market (say, for computer hard drives) then it doesn't have to worry so much about being out maneuvered by new technologies even if it doesn't take advantage of them itself (say, solid state drives).

I don't think the Netflix patents harmed Blockbuster as much as you'd have us believe. Blockbuster DOES have a comprable mail-in program, and even takes advantage of it's brick-an-mortar buildings by letting you trade in movies immediately. They still aren't winning, at least in part because they have this whole legacy of walk-in rentals that's floundering.

Re: Re: Do we have to wait for the paradigm for competition

Mjr1007 wrote:
Google was pretty good sized when it started beating M$ brains in on line. M$ had done a very successful job of defending it's monopoly through what courts have decided were illegal means for decades. If this is Mikebob's idea of competition then heaven help us.

An AC replied:
I don't know. It makes sense to me. In fact, it shows that Microsoft was vulnerable. Google did come out of nowhere to beat Yahoo, AltaVista, Lycos, Excite and a bunch of others at a time when people thought that no search engine could do anything.

Then it went on to beat Microsoft who has a ton of cash and supposedly had this all powerful monopoly to leverage.

And Google still beat them. I think that supports Mike's conclusion that the big company doesn't always win.

Can you explain how the big company won here?

Mjr1007Google:
Sure, no problem. The statement was how Google beat M$. The last good year M$ had with on-line properties ended Jun 05. Therefore little companies can beat big companies. For the sake of this point the other search companies which were much smaller then M$, don't really factor in. At the time that the article alludes to when M$ had trouble on line, Google had about a USD 100 billion market cap. While that was and is smaller then M$'s market cap, it's not, by most peoples definition, a small company any more. Even then Google's CEO went to great lengths not to incur the wrath of M$.

As far as the other search engines go, Yahoo subbed out search to Google and could have bought them for a few million, earlier on. Yahoo thought that search had come and gone and was trying to remake itself into a portal company. It wasn't so much Google beat their brains out as Yahoo dropped the ball. Again by the time people realized what was going on, Google was what most people would consider a big established company, at least on the Internet.

Hope that helps.

Mjr1007 wrote:
Additionally, IBM is still one of the largest computer company in the world.

An AC wrote:
But Microsoft destroyed them in the PC OS business, which IBM thought was it's to dominate. Again, exactly as Mike said. Most people thought that IBM, with it's position, power and reputation could easily destroy the little upstart.

Didn't happen.

Mjr1007Additionally
Basically IBM and M$ were in different businesses. M$ was a supplier to and partner of IBM for a long time. By the time they split up M$ was a pretty big company. OS2 was really designed for IBM to try to dominate the PC business again. Most of the PC vendors didn't really look on that favorably. It was also the case that because of a lack of drivers OS2 didn't run on that many non IBM machines. It was also the time when M$ was only giving it's best price to people who put their OS on all of their machines, effectively killing any competition.

So to summarize, by the mid 1990s, when OS2 died, M$ was a big company, using illegal means (as determined by the court) to eliminate competition. Not exactly a David and Goliath story. More of a Goliath and Goliath story.

An AC finished with:
Not sure how you can read those facts and say that Mike's position isn't correct.

Mjr1007Additionally
Actually a very astute observation. Give the fact as presented it would be hard to say Mikebob is wrong. Having actually been in the computer business and following the action, well let's just say Mikebob didn't get all the details right.

Re: Re: Do we have to wait for the paradigm for competition

mjr1007 wrote:
“The last year when Microsoft made a profit in its online services business was the fiscal year that ended on June 30, 2005. “
If you look back to the beginning of 2006, half way through the next year, Google had a market cap of over USD 100 billion. One of those nice small nimble companies, right Mikebob?

Mikepass replied:
mjrbob, may be they got to have that market cap by being good for a long time? You know, market capitalization does not happen just because someone had extra money laying around and they dropped 100 billion on a weirdly named company. Your argument is absolutely asinine.

mjr1007 replied:
I see some whining in someone's future. For those who haven't been following all of mine and Mikebob/pass post I just give you the condensed version. Some knucklehead thinks they are being clever by being rude , I reply in kind and then they start whining that I'm not nice. It doesn't do much for the discussion but apparently it helps Mikebob with pageviews.

Mikepass, your point is exactly my point, they did get that market cap by being good for a long time, at least by Internet standards. They were in business for a while and doing well before M$ decided they were a threat. At that point they were no longer a small company except in your's and Mikebob's mind.
The point here is that by the time M$ started to react Google was a big company.

mjr1007 wrote:
So, is it you assertion that IBM wasn't in the mainframe hardware, mainframe software, and services business when they were an M$ customer via their PC division? The only competition that IBM lost to M$ was OS2 and that was a very very small percentage of the IBM pie. Once again Mikebob, more rhetoric then reason.

Mikepost baited with:
mjrbob, are you REALLY senile enough to assert that IBM's main business now is still mainframes and that their service sector was anywhere as large then as it is now? There are numerous papers written about the transformation of IBM and its move from one industry into another. mjrbob, read a Forbes or something.

mjr1007 replied:
Mikepost, are pageviews down so much that you need to resort to this. I had no idea times were so tough for you. Sorry to hear it. Let me see if I can't drive some of those views up for you.

Mikebob's original post, which Mikepost conviently left out was
“Yes, after stumbling around for a while and having to choose an entirely different business to be in. It's successful now, but in a totally different business thanks in large part to Microsoft's efforts. “

My response wasn't to IBM's restructuring but rather to Mikebob's comment of having to choose a “TOTALY DIFFERENT BUSINESS”. So to summerize, IBM's main business were in place before M$, they didn't compete directly with M$, except in what was a very small division, PC OS software. IBM's mainframe business was being eaten by UNIX servers mostly. There may have been some PC servers but it's hard to see how M$ would be credited solely for creating a market where the software was a small part of the total machine cost.

Mikebob, do you see how this works. I don't go whining about the senility comment, or any other comment for that matter. I actually use facts and reason, not rhetoric and nonsense. Boy do I feel a “I Know you are but what am I” reply coming. Who knows maybe we'll see another one of those idiotic responses with the word rhetoric in every sentence.

A quick note about mjrbob. It's obvious a response to Mikebob, without any understanding as to why Mikebob became Mikebob. It was in a previous article where several days after the thread had gone silent a post by “bob” was so obsequious that it was pathetic. I may be accused of a lot of things but being obsequious to Mike is not really going to be one of them. So please, if you want to come up with an insulting nickname for me, could you at least have it make sense. Of course given your post, having anything make sense seems like a real struggle for you.

Some commentary on Netflix

If you look at the timing, Netflix was born out of necessity to distribute "Open DVD" to customers.

Back in the late 1990s, Blockbuster was owned by Viacom, and they had an equity stake in The Circuit City Divx. By virtue of this, they didn't want to support the "Open DVD" standard. What happened was an artificial constraint, and no place for customers to rent "Open DVDs".

Not wanting to support a competitor's business strategy, and still realizing a need to rent DVDs, Bestbuy started promoting Netflix (along with some other obscure mail-based service) in it's stores so customers could have some place to rent movies. So that's what got it "running and out the door"... Artificial scarcity. :-)

Mike doesn't understand the "C" word.

Mike -- sadly you don't understand the difference between
"canibal" and "creator."
What you call Canibal we call Creativity.
To explain:
A canibal eats YOU for lunch.
A creator creates food for himself and others to eat.
Patentor

Re: Re: Re: Do we have to wait for the paradigm for competition

They were in business for a while and doing well before M$ decided they were a threat

How moronic. Just because MS didn't see Google as a threat when it was small, doesn't mean that it wasn't already. You are actually PROVING mike's point. Large companies often are too slow and near sighted to react to new and smaller competitors until it is too late and the competition has too much momentum behind them. If you want to get into numbers, by the way, Google was a thread before its IPO and before any real "market cap" was assigned to it.

Re: Re: Re: Do we have to wait for the paradigm for competition

mjrbob,

Someone is being rude to you and you "reply in kind?" And somehow you think you are a better man by starting the childish "But MOOOOOM, he REALLY started it first! WAAHHHH!!"

Hilarious.

By the way, if you are REPLYING, it makes to sense to say REPLIED. You can't have a past tense for an action that is occurring. And it does not obfuscate lack of clear reasoning nearly enough. Try different font colors or something instead.

Re: Re: Re: Re: Do we have to wait for the paradigm for competition

Mjr1007 wrote:
They were in business for a while and doing well before M$ decided they were a threat

Mikepost replied:
How moronic. Just because MS didn't see Google as a threat when it was small, doesn't mean that it wasn't already. You are actually PROVING mike's point. Large companies often are too slow and near sighted to react to new and smaller competitors until it is too late and the competition has too much momentum behind them. If you want to get into numbers, by the way, Google was a thread before its IPO and before any real "market cap" was assigned to it.

mjr1007 replied:
At this point I'm really not sure how to respond, let me see if I can dumb this down so that even an knucklehead like yourself can understand it.

The title of the article
The Big Company Doesn't Always Win”
The examples given were one big company beating another.
It was not the case of a small company coming in while small and beating a big company.
It's reasonable to say large companies can't transition to the next big thing.
It's not reasonable to say that a small company directly competed with a large one and won.
Google did a great job of not incurring M$ wrath while small, but they certain didn't beat them when they were small.
You do realize there is a difference between being a threat and actually fighting the battle. Probably not.

Really Mikepost, it's just childishly simply to point out the flaws in your argument. Conflate threat with actually fighting and then claim Google was a threat years before they started fighting.

Many realized at some point there would be a fight, but by the time it got going Google was a big company already. Which is fine, you can say one big company replaces another as the 800 lb gorilla but you can't say that a tiny little Google beat M$, it was a BIG GOOGLE which is beating M$.

In the grand scheme of things it's a small point except for the fact that Mikebob keeps saying large companies don't always win. Well when you have to large companies competing it's hard to see how a large company won't win.

Re: Re: Re: Re: Do we have to wait for the paradigm for competition

Someone is being rude to you and you "reply in kind?" And somehow you think you are a better man by starting the childish "But MOOOOOM, he REALLY started it first! WAAHHHH!!"

Hilarious.

mjr1007 replied:
How utterly witty. Clearly I have more then met my match. What's next stomping your feet? I do find it interesting how these discussions always degenerate into nonsense. Give the forum what can one expect.

A confused Mikepost wrote:
By the way, if you are REPLYING, it makes to sense to say REPLIED. You can't have a past tense for an action that is occurring. And it does not obfuscate lack of clear reasoning nearly enough. Try different font colors or something instead.

Mjr1007Additionally
Thanks for the English lesson, but you might want to proof read before posting. You left out a not and are actually contradicting yourself in the first sentence. I try not to get to picky with this sort of things since I assume there are many folks out there who like me suffer from “lexdysia” (that's dyslexia to most). You will excuse me for point this one out though, the irony was just too much.

By the time you read the reply it is in the past, we are not IMing so it really isn't interactive.

As far as colors and fonts, It seem you don't have that problem because you never take the full context anyway. If it gets too terribly difficult for you to follow, you could just stop trying to respond. It is better to be thought a fool then to open one's mouth and assure everyone.

Just some observations

Now that the last knucklehead has stop commenting it's time to look at some of the problems here.

It's interesting to see what Mikebob does and doesn't respond to in the comments.

Really Mikebob, do you want this to become a ridiculous attempt at an English class. It might just behoove you to step in occasionally to set some ground rules. I noticed that you were able to eliminate some Spam so clearly you do occasionally clean things up. I'm not suggesting that you delete off topic comments, just give people a reminder of what the topic really is. I'm sure you legion of fans would take their cue from you. Of course these are the kinds of comments that drive traffic (the Jerry Springer of the Internet) so it would seem unlikely to end anytime soon.

As far as the topic is concern, there is a disturbing pattern here. Mikebob takes a news report and distorts it to fit his pet theories, usually through false premises, unsound logic or both. The discussion bogs down over the details for several days, probably till traffic dies down, never really getting to point and then after there is a quite period an obsequious post for Mikebob appears. It's really unfortunate that such important issues are subordinate to Mikebob's need to drive traffic. This is yet another example of the market being manipulated for the suppliers benefit. If this is what passes for dialog I shudder to think about the future.

Of course many of the post here take their cue from Mikebob himself. Portraying economics as a unified field where all are in agreement. Of course a cursory look at the field would tell even a moron in a hurry that there are so many different schools of thought, most of which disagree with each other, and so many paradoxes and tragidies and other problems that nothing could be further from the truth. The real problem is that most of Mikebob's pet theories just don't fit the facts, but of course like most dogmatic true believers he can always find someone or something else to blame for the failures that are so readily apparent.

The constant cycle of deregulate, disaster, re-regulated seems to be almost never ending, yet there are still knuckleheads, like Mikebob, who will scream at every turn, the market the market, without ever explaining what a real free market needs to continue to be a free market.

Larger numbers of suppliers and consumers.
No single supplier or consumer large enough to impact the market
Equal access to information about the products and the market
Easy entry and exit into and out of the market
A regulatory regimen to eliminate collusion between suppliers or consumers

Without these criteria being met, you really don't have a market at all. For Mikebob to suggest that changing who dominates a new area every few decades is a free market is just utter nonsense. But what would you expect from a guy who creates a poor imitation of slashdot and then claims to be a visionary?

Michael -- your title "The Big Company Doesn't Always Win" is correct in the same way that "A Machine Gun Doesn't ALWAYS Kill People."
But -- shall we put this is the most polite and kind way
A Machine Gun, properly aimed at a exposed target "GENERALLY" has a SLIGHT ADVANTAGE.
Your title is pure POOPAGANDESE -- or double speak (for the intelligencia).
Loads of Laywer, TONS OF MONEY -- ENDLESS ability to wait and drag lawsuits on FOREVER AND EVER, certainly gives them a "slight edge," don't you think? Or -- to phrase that another way -- DO YOU THINK before you write

You missed the point

The question is not whether it is possible for a small company to out compete a larger company. You are correct that this is often the case.

The question is whether we want that to happen more often than it now does; or rather, whether we want inventors to be able to work independently from larger companies should they so desire.

The weakened patent system has made a division of labor between inventors and entrepreneurs so difficult, that it is now possible for people (like you here) to question what the point in protecting patents is at all. You have to imagine a world with more R&D labs like Xerox PARC, Rearden Labs, etc. in order to see why stronger patents would be beneficial to society. But that takes imagination, not slavish attention to present realities.

Re: You missed the point

With all due respect to the Mikes I think they are both missing the point, completely.

This whole discussion about small companies beating large ones begs the question, why have large companies in the first place. There is no advantage to the consumer and the temptation to misuse their market power is almost irresistible. Virtually all companies can be broken up into component parts.

Take M$ as an example. Clearly they have not achieved their market dominance by producing products the consumers want in a timely fashion. They should be broken up into lines of business and further broken up into software development and sales. Much like the kernel in Linux can be the core of multiple distros, so too could M$'s kernel be used.

Companies come and go, if it's in a real market then there is little impact. Once they grow to the size of an M$, the have a huge impact when they eventually fail. It's much better to break up large companies and let the constituent parts compete with others on equal footing.

One could even encourage companies that dominate their space to allow competition by follow Masnick's suggestion of eliminating their IP rights, I'm sure M$ wouldn't mind loosing their copyrights, right Masnick.

Re: Re: You missed the point

@mjr1007:

I think you're partially right here. The way I understand what you're saying is that there will always be a need for antitrust law to break up anticompetitive monopolies. I agree with that. IP, properly understood as an exclusive right to the time that inventors spending solving an R&D problem, does not raise antitrust concerns.

Although I can't speak for Mike, both of us might also agree (I do) to having overstated the frequency with which small companies beat out large ones. It's hard, and it doesn't happen all the time.

But here's a challenge back to you: without a patent system, how would we ensure that inventors -- not entrepreneurs -- get any part (even the tiniest bit) of the wealth created downstream by entrepreneurs using their ideas.

I don't believe that inventors should split the wealth 50/50 with entrepreneurs. I agree with the VCs and entrepreneurs who say that early-stage commercialization is hard, and that early-stage entrepreneurs deserve more of a reward. But the status quo (which might be 99.9/0.1 or even higher averaged out) is not fair to inventors. And that's why you see so much R&D getting done abroad now, by the way.

How can you get inventors a seat at the bargaining table with larger corporations without patent rights? The few who are willing to give up their R&D work to become entrepreneurs have the VC community at their back. What about the rest of them? Do we want them to just keep to their academic pursuits?

I don't think so. I think we want to give incentives to the brightest minds to spend time thinking about problems that matter to people.

Re: Re: Re: You missed the point

Can I get an Amen brother.

The system I've been flogging is compulsory licensing with a cap of 10% for licensing of all IP. I was flogging it before I read about the LTE patent pool which, wait for it, capped the total licensing fee at 10%. Here is a link to Mikebob's rejection of it.

If big telcos have come to see the inevitability of patent pools can the rest of the world be far behind. I think they have shown a keen grasp of the obvious. By making it the law, rather the voluntary it will make the research effort much stronger. It will be important in the future for people and companies to see the licensing of really good IP as just the cost of doing business. Once there is a market for it, people and companies will step in to fill the demand.

This is sort of the half a loaf, or don't throw the baby out with the bath water solution. I'm just full of sayings tonight, aren't I. The point here is to fix the patent system not get rid of it. It monetarily incentivizes inventors without the problem of monopolies. The alternative would be that companies would start protecting IP with tradesecret laws and then nobody would ever see it. There would be more emphasis on the process of building the materials rather then the designs of the products. It would warp how things are made in ways that would only slow down progress, IMNSHO.

Of course there are other possible solutions as well. There is a movement of inventors for hire. I think this isn't as good because it doesn't allow individuals to pursue their own interest, but it certainly is a reasonable business model for those who chose it.

Thanks for the post, I've really gone at it with some of the Miketts here at slashdot lite. It's really nice to see a voice of reason.

Re: You missed the point

The question is whether we want that to happen more often than it now does; or rather, whether we want inventors to be able to work independently from larger companies should they so desire.

I don't see how that's part of the question at all. The question is how do we best promote the progress of the science and the useful arts, as per the constitution.

I'm not sure what that has to do with large, small or independent entities.

The weakened patent system has made a division of labor between inventors and entrepreneurs so difficult, that it is now possible for people (like you here) to question what the point in protecting patents is at all.

I'm confused. What weakened patent system? In the last 56 years the only thing we've seen is our patent system get stronger.

You have to imagine a world with more R&D labs like Xerox PARC, Rearden Labs, etc. in order to see why stronger patents would be beneficial to society. But that takes imagination, not slavish attention to present realities.

Why would a world with more Xerox PARC's be seen as beneficial to society? PARC invented a bunch of stuff, but with no business model, let it all collect dust in the corner until others came along and reinvented the wheel. If anything PARC is evidence against the patent system.

Re: Re: Re: You missed the point

But here's a challenge back to you: without a patent system, how would we ensure that inventors -- not entrepreneurs -- get any part (even the tiniest bit) of the wealth created downstream by entrepreneurs using their ideas.

I guess I'm at a loss as to why this is considered a problem. Inventors can easily team up with entrepreneurs or put in place a contractual relationship. What does that have to do with patents? If the inventor is such an integral part of the downstream success, why isn't he on a retainer contract to take part in the efforts to take the idea and turn it into a successful business.

If he is not, then it's quite likely that the end result will have almost nothing to do with the original idea, and there will be little reason to reward that individual.

I don't believe that inventors should split the wealth 50/50 with entrepreneurs. I agree with the VCs and entrepreneurs who say that early-stage commercialization is hard, and that early-stage entrepreneurs deserve more of a reward. But the status quo (which might be 99.9/0.1 or even higher averaged out) is not fair to inventors.

Who's to say what's fair? What's wrong with letting the market work out what's fair. If the inventor is important, then companies will compensate him or her to do the necessary inventing.

How can you get inventors a seat at the bargaining table with larger corporations without patent rights? The few who are willing to give up their R&D work to become entrepreneurs have the VC community at their back. What about the rest of them?

Again, there are numerous models by which the inventor gets compensated, by working with the companies that are commercializing the product. I don't see why this is such a problem to you.

I don't think so. I think we want to give incentives to the brightest minds to spend time thinking about problems that matter to people.

Indeed. But tragically, the economic research that has been pointed out here over and over again shows the exact opposite is what happens. The patent system tends to act as a decreasing incentive on innovation, rather than an increasing one.

Whereas commercial success tends to do the opposite. It gives companies more incentive to fund the basic research that is necessary for the next great breakthrough.

Reply to Mr. Masnick

Mike,

I'm glad you asked --

"I guess I'm at a loss as to why this is considered a problem. Inventors can easily team up with entrepreneurs or put in place a contractual relationship."

Contracts and torts can only go so far when it comes to ideas. Can an inventor promise to forget the ideas he learns should he later decide to leave the company? And if not, how can the entrepreneurs ensure that the inventor won't take his ideas with him to a competitor unless a patent right guarantees exclusivity to the entrepreneur who pays him? Patents perform a function that trade secrets and contracts cannot by partitioning the inventors work on a particular problem into legal rights that can be assigned to a particular entity. Read Paul G. Heald on this point.

"Who's to say what's fair? What's wrong with letting the market work out what's fair. If the inventor is important, then companies will compensate him or her to do the necessary inventing."

What market? There is no liquid market for inventors' time right now. The market for naked patent rights is not equivalent. The existing market for venture-capital financing is for the small subset of inventors who don't mind working full-time as entrepreneurs for at least a few years.

"Again, there are numerous models by which the inventor gets compensated, by working with the companies that are commercializing the product. I don't see why this is such a problem to you."

The "numerous models" that I see are: (a) work at a university and earn a non-profit sector salary; (b) start a company either with self-financing or venture-capital; (c) go to work at one of the handful of large corporations that still vertically integrates some R&D.

Assuming that there are benefits to a division of labor between R&D and commercialization, the only one of these that permits it now is (c). But there are fewer (c) in the U.S. than ever before because of the Bayh-Dole Act.

"Indeed. But tragically, the economic research that has been pointed out here over and over again shows the exact opposite is what happens. The patent system tends to act as a decreasing incentive on innovation, rather than an increasing one."

I've read the same academic research that you have. There are some bright professors working diligently to figure out how to fix the problems with the system. None have a complete picture of the entire pipeline from discovery to invention, to early-stage commercialization, to acquisition, to consumer commercialization, to commoditization. That takes more perspective than any academic is capable of right now.

There are multiple moving parts to the system. Patents first strengthened, then weakened between 1980 and 2008. Patent procurement first got more expensive, then cheaper over the same period. Patent litigation got more expensive throughout. Bayh-Dole made vertically integrated R&D (in the U.S.!) less competitive from a cost-perspective. The explosion in venture-capital investment made entrepreneurship easier. The Sarbanes-Oxley Act made IPOs more expensive. The credit market debacle has made acquisitions more difficult.

You have to understand all of these economic factors to understand why R&D is moving overseas, and why the patent system needs to be stronger.

I don't fault you for disagreeing with me. These are very complex problems. Nonetheless, with the big picture in mind, the solutions are not so complex.

Re: Reply to Mr. Masnick

Contracts and torts can only go so far when it comes to ideas. Can an inventor promise to forget the ideas he learns should he later decide to leave the company? And if not, how can the entrepreneurs ensure that the inventor won't take his ideas with him to a competitor unless a patent right guarantees exclusivity to the entrepreneur who pays him? Patents perform a function that trade secrets and contracts cannot by partitioning the inventors work on a particular problem into legal rights that can be assigned to a particular entity.

Why should an inventor need to forget ideas? You're too focused on protecting and "owning" ideas. That's simply not necessary. Entrepreneurs worried about people going to competitors aren't focused enough on innovation.

Recent research has shown that the very reason for Silicon Valley's success was the fact that people constantly shifted jobs to competitors *and* were often quite open about sharing ideas with competitors to help focus on innovation, rather than competition:

Not the market for inventors' time. The market for innovation as a whole. That will include an inventors' time, because the demand for innovation exists, and so too will the models that compensate the inventors. It seems like you may be defining the "market" too narrowly here.

The "numerous models" that I see are: (a) work at a university and earn a non-profit sector salary; (b) start a company either with self-financing or venture-capital; (c) go to work at one of the handful of large corporations that still vertically integrates some R&D.

And because those are all you see that's all that can exist? :) I don't think so. First of all, there's a lot of wiggle room in your broad descriptions. What's wrong with starting a company, for example? There are also plenty of other models, including consulting arrangements, hire-for-expertise, advisory roles and many others.

Assuming that there are benefits to a division of labor between R&D and commercialization, the only one of these that permits it now is (c). But there are fewer (c) in the U.S. than ever before because of the Bayh-Dole Act.

I'm not sure where you get the idea that there's a huge benefit to division between R&D and commercialization. I'd argue the opposite is true in many cases.

I've read the same academic research that you have. There are some bright professors working diligently to figure out how to fix the problems with the system. None have a complete picture of the entire pipeline from discovery to invention, to early-stage commercialization, to acquisition, to consumer commercialization, to commoditization. That takes more perspective than any academic is capable of right now.

Perhaps. But nearly all of the research I've seen points in one direction. And when you combine some of the other areas of research that act as a natural "mirror" on the market for invention, I get the feeling that a lot more folks than you believe have the perspective necessary to understand what's going on.

There are multiple moving parts to the system

I absolutely agree. That is, and always has been, the biggest challenge in economics. The number of variables is staggering, and often difficult to impossible to measure. But that doesn't mean you ignore the variables you can measure.

You have to understand all of these economic factors to understand why R&D is moving overseas, and why the patent system needs to be stronger.

Uh, whoa. There's a HUGE leap in that second half of the sentence, without a single bit of evidence to support it.

I don't fault you for disagreeing with me. These are very complex problems. Nonetheless, with the big picture in mind, the solutions are not so complex.

The problem is that you haven't painted a big picture. You've dismissed the big picture by pointing out the fact that there are other variables.

Re: Re: Reply to Mr. Masnick

I respect your skepticism, Mike. You want evidence, and direct evidence there is little. The evidence is all indirect. What's really going on has to be deduced from the problems and workarounds that have emerged in various fields.

"Why should an inventor need to forget ideas? You're too focused on protecting and "owning" ideas. That's simply not necessary. Entrepreneurs worried about people going to competitors aren't focused enough on innovation."

Entrepreneurs (and other IP investors) want to have some assurance that an inventor is not going to be able to take everything with them to a competitor -- or threaten to do so -- at a crucial stage. As you know, building a company requires a complex, multi-stage strategy. The risk that a key person is going to defect to a competitor is one that entrepreneurs (and their investors) want to hedge against in any way possible. As I said, trade secrets and contracts (such as non-competes, &c.) are a very weak way for inventors to bond themselves to a company. Patents aren't bullet proof; but they're much better than the alternatives. If they were stronger, there'd be a more liquid market for good inventors.

"Recent research has shown that the very reason for Silicon Valley's success was the fact that people constantly shifted jobs to competitors *and* were often quite open about sharing ideas with competitors to help focus on innovation, rather than competition:"

That's valid research. I absolutely agree that there are benefits to cross-pollination. But shouldn't the company that spent the time and money investing in R&D get at least part of the benefits of the work that the inventor did on that R&D while he or she was working for them? In a world with only trade secret and tort, two companies will end up fighting out in court (or settling with a handshake, Silicon Valley-style) what could be handled with a (tense) negotiation were patents stronger.

"Not the market for inventors' time. The market for innovation as a whole. That will include an inventors' time, because the demand for innovation exists, and so too will the models that compensate the inventors. It seems like you may be defining the "market" too narrowly here."

Now we're on the same page. The market for the innovation as a whole is absolutely the relevant market. And the contribution that early-stage entrepreneurs make is very important to demonstrate the value of the IP. You've essentially agreed here with the point I'm trying to make -- that inventors' time is still part of the value that's being paid for in the market for innovation. In the world we live in in Silicon Valley right now, only the handful of inventor/entrepreneurs who are lucky enough to be connected into the VC community can get anything near fair value for their work. Everybody else gets cents on the dollar.

...

I was generalizing on the business models -- of course there are lots of companies that don't fit easily into those boxes. That's the point of making the generalization.

...

"Perhaps. But nearly all of the research I've seen points in one direction. And when you combine some of the other areas of research that act as a natural "mirror" on the market for invention, I get the feeling that a lot more folks than you believe have the perspective necessary to understand what's going on."

Two responses: first, you say everything points in one direction. What direction is that? That we should get rid of the patent system? That issued patents should be higher quality? The problem with the papers I read is that none (with a few important exceptions) are based on an accurate THEORY of how the patent system adds value to the economy. The Founding Fathers and the Venetians had a theory -- give artists and inventors exclusive rights to their work, and they'll produce more of it. Almost none of the academics have any theory about how inventions add value to society. It's a very complex economic theory of endogenous growth; there aren't many economists even who understand it. In point of fact, economists are STILL arguing about how endogenous growth works. But that's just because it's difficult to measure. There's no argument about the fact that it does occur, or that human capital is a big driver in promoting endogenous growth.

Second, in response to your point about how lots of other people disagree. Yup. So what? I'm used to that. Just because other people disagree doesn't mean I'm wrong.

"Uh, whoa. There's a HUGE leap in that second half of the sentence, without a single bit of evidence to support it."

Mike, although the nitty gritty theory is complex, it's really this simple in the end: if you pay an engineer the same salary in Euros or Yuan or Rupees, the engineer can afford to live a much higher quality of life in Europe, China, or India than they could afford in Palo Alto.

If for whatever reason, you want the engineer to stay in Palo Alto, you have two options:

(A) Close the trade deficit and increase the value of the dollar relative to foreign currencies;
(B) Pay more U.S. dollars.

Nobody has the power or the time to do (A) over a length-scale (or money-scale) that is remotely feasible for even the largest businesses in the world.

(B) makes sense in certain circumstances (like when its a startup and the business people and investors live in Palo Alto), but it's not worth it for many businesses when -- on top of the additional expense -- they have to worry also about their IP walking out the door with the engineer later. Ask any lawyer about the enforceability of non-competes in California, and you'll see what I mean.

In a world without strong patent rights, the U.S. will lose the best engineers again and again.

Incidentally, increasing the strength of patent rights would eventually help with both (A) and (B).

Re: Re: Re: Reply to Mr. Masnick

Entrepreneurs (and other IP investors) want to have some assurance that an inventor is not going to be able to take everything with them to a competitor -- or threaten to do so -- at a crucial stage. As you know, building a company requires a complex, multi-stage strategy. The risk that a key person is going to defect to a competitor is one that entrepreneurs (and their investors) want to hedge against in any way possible.

Just as any company would prefer a monopoly of some sort. But most people with any inkling of basic economics knows that's actually not good for the overall economy.

Again, I point you to the studies on people and idea flow in Silicon Valley to show why the point you're trying to make above is meaningless. Just because some companies want it doesn't mean it's actually good for those companies or the overall industry. As the studies have shown, the opposite is often true.

If inventors move to competitors, it's all part of the process, and it simply drives more competition.

If we had things your way, the computer industry would be quite different than it actually is today, because Robert Noyce, Gordon Moore and Andy Grove never would have been able to leave Fairchild to create Intel (hell, Noyce and Moore wouldn't even have been able to leave Shockley to create Fairchild).

But shouldn't the company that spent the time and money investing in R&D get at least part of the benefits of the work that the inventor did on that R&D while he or she was working for them? In a world with only trade secret and tort, two companies will end up fighting out in court (or settling with a handshake, Silicon Valley-style) what could be handled with a (tense) negotiation were patents stronger.

Again, you've failed to explain why competing in the marketplace doesn't solve this issue most effectively. You again are weighing way too heavily the importance of the idea itself. Trust me, I've been at companies where the original idea generator left to start a competitor, and since the *company* itself had more actual experience implementing, we were able to stay ahead of his "idea" at the new firm.

You are giving way too much weight to the idea.

The real world doesn't work that way.

Now we're on the same page. The market for the innovation as a whole is absolutely the relevant market. And the contribution that early-stage entrepreneurs make is very important to demonstrate the value of the IP. You've essentially agreed here with the point I'm trying to make -- that inventors' time is still part of the value that's being paid for in the market for innovation. In the world we live in in Silicon Valley right now, only the handful of inventor/entrepreneurs who are lucky enough to be connected into the VC community can get anything near fair value for their work. Everybody else gets cents on the dollar.

Hmm. I'd love to see some actual evidence on that. Again, this comes down to the same point: you are overvaluing the importance of the idea. You have decided what "fair value" is, when the market has clearly shown it to be much lower than what your made up number is.

I trust the market to be correct.

Two responses: first, you say everything points in one direction. What direction is that? That we should get rid of the patent system? That issued patents should be higher quality? The problem with the papers I read is that none (with a few important exceptions) are based on an accurate THEORY of how the patent system adds value to the economy.

Oh really? I agree that some have used odd proxies, but the combined weight of all that research suggesting no real increase in innovation/economic growth thanks to patents seems fairly damning concerning the entire point of patents.

I certainly understand that there are situations where the market may fail, but it's pretty clearly the exception, not the rule. The patent system assumes that market failure is the rule. I think that if you're going to regulate by handing out economic incentives to correct a market failure, you should at least be required to prove the market failure first.

The Founding Fathers and the Venetians had a theory -- give artists and inventors exclusive rights to their work, and they'll produce more of it. Almost none of the academics have any theory about how inventions add value to society.

Really? Most of the ones I've seen have a pretty good grasp on it.

It's a very complex economic theory of endogenous growth; there aren't many economists even who understand it. In point of fact, economists are STILL arguing about how endogenous growth works. But that's just because it's difficult to measure. There's no argument about the fact that it does occur, or that human capital is a big driver in promoting endogenous growth.

Hmm. I agree that the economic research on endogenous growth is still in its early stages, but I think there's plenty of economists who do clearly understand it, and there's been enough important work in the field over the past 25 years that to brush it all off is silly.

if you pay an engineer the same salary in Euros or Yuan or Rupees, the engineer can afford to live a much higher quality of life in Europe, China, or India than they could afford in Palo Alto.

THAT's your theory? Either in simplifying it you left out a *LOT*, or your theory is total bunk and attempts to refute pretty much all basic economic theory.

If for whatever reason, you want the engineer to stay in Palo Alto, you have two options:

(A) Close the trade deficit and increase the value of the dollar relative to foreign currencies;
(B) Pay more U.S. dollars.

Yes, this is why so many foreign engineers are dying to get into the US and applying like mad for US work visas.

You have heard of quality of life, right?

(B) makes sense in certain circumstances (like when its a startup and the business people and investors live in Palo Alto), but it's not worth it for many businesses when -- on top of the additional expense -- they have to worry also about their IP walking out the door with the engineer later. Ask any lawyer about the enforceability of non-competes in California, and you'll see what I mean.

Again, you are overweighing the importance of that one person's ideas. See the recent research I pointed to on startup founders who die early in the life of their company. It rarely impacts the growth trajectory of the company. One person leaving is not something that companies should be worried about.

And, clearly, you did not read the research I recently spoke about concerning NDAs and Silicon Valley if you think you need to tell me about the enforceability of NDAs in Silicon Valley.

That's the whole point. The fact that they're NOT enforceable is what made Silicon Valley so successful. The fact that people jump ship and ideas percolated across companies, allowing them to more rapidly compete in the *real* market is what helped *grow* the industry and incent more innovation.

In a world without strong patent rights, the U.S. will lose the best engineers again and again.

Right. And that's why engineers flocked to Switzerland when it had no patent system.

In actuality, they went there *because* of the lack of the patent system. Because it allowed them to innovate more freely without having to pay that expensive "cost" of dealing with patent thickets.

That's why you see so many engineers against software patents as well. They know that it *increases* their expense in developing and makes it harder to innovate.

Thanks

Mike,

I would mostly be repeating myself, so I'll let you have the last word here. I'll just clarify that I wasn't talking about NDAs, but about Non-compete agreements in my last post -- substantially different animals.

Thanks for mapping out the disagreement between us. I found it useful. Essentially, you've taken Kenneth Arrow's point of view on how competition promotes innovation, and I've taken Schumpeter's.

Re: Thanks

I would mostly be repeating myself, so I'll let you have the last word here. I'll just clarify that I wasn't talking about NDAs, but about Non-compete agreements in my last post -- substantially different animals.

Actually, it was I who misspoke. The research is about noncompetes -- not NDAs. Not sure why I wrote NDAs. Probably because it was 4am

Either way, that clarifies that you clearly did not read the research, because it's about noncompetes. :)

Either way, it shows that innovation is ENCOURAGED when people leave and go to competitors. Which is exactly the opposite of your supposition.

Thanks for mapping out the disagreement between us. I found it useful. Essentially, you've taken Kenneth Arrow's point of view on how competition promotes innovation, and I've taken Schumpeter's.

That is mostly true, though as you note in your separate post, there are some similarities between the two. But historically I think it's pretty well established that Schumpeter was quite wrong in his assumptions. Arrow on the other hand seems to get borne out more and more over time.